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Why it would be wrong to write off the Brics

By Jim O'Neill, The Financial Times
January 05, 2009

Is it now time to edit this group to “Bic”, dropping the R? Are all the Brics, for their own internal reasons, going to find the challenge of a weakened US economy much harder to cope with than they expected? Or are we going to discover that not only can these nations cope better than people in the west think, but that some of their own forms of economic model will be mimicked by developed countries to help them cope with the decline of private sector market systems?

Will the pressure to increase their presence in global institutions disappear as their growth falters, or will 2009 at last be the year that the Group of Seven leading industrialised nations and G8 vanish from the agenda, the G20 takes over and we see the beginning of a new reality?

The latest forecast from Goldman Sachs for growth in the world’s gross domestic product is a pitiful 0.6 per cent in 2009. We project the advanced economies to decline by 1.2 per cent. The 0.6 per cent growth is derived from the projected GDP growth of about 4.7 per cent in the Brics. The Bric economies account for about 15 per cent of global GDP.

Our projections for domestic demand are similar to our GDP numbers, which means the Bric countries will be the only source of domestic demand growth globally in 2009. In 2010, we forecast, domestic demand growth in advanced economies will recover to 1.2 per cent and in the Bric economies will accelerate to 7.2 per cent, fuelled by China’s stimulus. So, coming on top of 2008, we project that for three consecutive years we will have seen global demand expansion led by the Bric economies.

It is in this light that the doubters should question whether the Brics’ story is really over. By the end of the decade they may be close to representing 20 per cent of global GDP. This is dramatically higher than any of the four scenarios we considered in 2001 when I first wrote about the likely emergence of the Bric economies. Rather than suggesting our Bric dream may be derailed by the global recession, the notion that the Brics can become collectively bigger than the G7 by 2035 is becoming more plausible.

So what does the west do? Should it continue to worry about the Brics’ emergence and bemoan their systems of governance; or, influenced by Barack Obama, the new US president, should it embrace their involvement? Should the UK, which is chairing the G20, propose a proper reform of world governance that seats these countries at the same table as the rest? Of course it should. With Larry Summers, former US Treasury secretary, in an important seat at the White House, and having been the creator of the G20, what better chance do we have to bring these countries into the centre of policymaking?

Past concerns about their lack of democracy or market openness need to be put to one side, especially as most G7 countries have now realised that using government to help guide markets is not such a bad thing. When the G20 met last October in Washington, there was a long list of things to do. There is not much chance of achieving any of these unless the system of global governance and the G20 itself are recognised as the main decision-making forum for all these issues.

In my judgment, it would be much better to have something between the current G7 and the G20 but, as wiser heads within the diplomatic world remind me, it is easier to bring people in than to ask them to leave. Ultimately all the Europeans, especially countries that share a common currency, should represent themselves as one unit. If that day ever arrives, we can then talk about a new G4 for global finance and a G12 for the heads of state (the current G8 plus Brazil, China, India and perhaps South Africa).

As for the “R” in Bric, of course it should remain. Even though the Russian economy may contract in 2009, it will survive this crisis. To help itself, and those who benefited from its boom, it needs to demonstrate it can introduce policies to reduce the importance of oil prices for its economic future. It also needs to make a commitment to better corporate governance and implement it; pursue policies to raise productivity; and improve its demographic profile by addressing concerns about lack of population growth.

The writer is the head of global economic research for Goldman Sachs

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